Matt Hern's Money Guidehttps://matthern.com.au
Helping you get more life out of your money!Tue, 11 Dec 2018 05:12:44 +0000en-AUhourly1https://wordpress.org/?v=5.0https://i0.wp.com/matthern.com.au/wp-content/uploads/2018/07/cropped-Matt_Hern.png?fit=32%2C32&ssl=1Matt Hern's Money Guidehttps://matthern.com.au
3232149447225Subscribe with My Yahoo!Subscribe with NewsGatorSubscribe with My AOLSubscribe with BloglinesSubscribe with NetvibesSubscribe with GoogleSubscribe with PageflakesSubscribe with PlusmoSubscribe with The Free DictionarySubscribe with Bitty BrowserSubscribe with NewsAlloySubscribe with Live.comSubscribe with Excite MIXSubscribe with Attensa for OutlookSubscribe with WebwagSubscribe with Podcast ReadySubscribe with FlurrySubscribe with WikioSubscribe with Daily RotationTo be notified of the latest money tips and articles as soon as they are released subscribe in your favourite feed reader or by e-mail. All the best, Matt HernYour best next stephttp://feedproxy.google.com/~r/MattHernsMoneyGuide/~3/d7ZL68P_Wqg/
Mon, 10 Dec 2018 10:59:06 +0000https://matthern.com.au/?p=2156Quite regularly I get a tingly feeling that I want to be physically healthier – fitter, stronger, thinner and more flexible.

Most of the time, I do nothing. Why?

One reason is that I quickly become overwhelmed by the options. Changing will be hard and I want to be effective and efficient, and among all the options I don’t know where is best to start for me. So, I lose momentum and keep doing what I’ve always done.

It’s similar with our ambitions to be healthier financially. Changing our behaviours will be hard, so where’s the best place to start?

A map

I define being financially healthy as the confidence you can
afford a life you love, today and tomorrow.

To help you navigate the thousands of financial options let’s start with a map of the territory, which I call the 3Cs of Money Mastery.

Cash Flow is King! The biggest determinant of having money for what matters most to you in life is how you actively earn, spend and save your money.

The Capital you have saved by spending wisely is a primary source of your financial security and independence. This element captures all the strategies related to investing wisely.

The third and most overlooked element is that of your Contingencies, which will help fund your desired life choices if misfortune strikes. This element captures all the strategies to wisely protect your lifestyle and your capital.

The journey

The journey to financial health and independence is like the journey to physical independence.

We don’t sprint out of our mother’s womb. In fact, we’requite immobile, living meal to meal. We first need to learn foundational gross motor skills like rolling and sitting. Then we add fine motor skills and coordination as we learn to feed ourselves, crawl, walk and eventually run.

In managing money, we start living pay to pay until we learn cash flow management skills, which are the foundation of our financial health. As our savings and competency grow we can add wealth creation skills.

This journey to financial independence is captured in my Six Stages of Wealth Creation model below.

Where to start

Two concepts that have really helped me in my parenting are to reframe my expectations based on behaviours that are developmentally appropriate, and to remember that it is a journey where each stage builds on previous ones.

To be most effective with your efforts to improve your financial health start with the actions that are developmentally appropriate for you. Ignore what everyone else is doing.

Use the Outlook column in the Six Stages to identify your stage in the journey based on your current financial behaviours.

Your outlook may be year-to-year if you consistently save each pay but by the end of each year those savings are used.

Someone with an outlook of up to 5 years has savings that
grow each year, but when it comes to predictable expenses such as a car upgrade
or renewing their kitchen and bathroom they still need to borrow.

If you assessed yourself in the bottom three stages, you are not alone. A raft of research has shown that most (yes, at least half) of adult Australians spend all they earn and have minimal savings.

However, whilst you may not be alone, I believe you don’t yet have optimal financial health and independence until you are confidently on track to retire by age 67 with your desired lifestyle. (I chose age 67 because that is the current eligibility age for the government age pension.)

Your primary developmental target needs to be knowing you are on track for stage 4. By laterally interpreting the research I estimate less than 20% of adult Australians currently achieve stage 4 and higher. I am on a mission to improve that number.

What to do now

Once you’ve identified your stage use the right-hand column to identify where to focus your efforts right now.

Those in stage 1 need to focus on the fundamentals of cashflow control, incorporating budgeting. A cash flow coach, who is much like a financial personal trainer, is an excellent professional partner to support you in learning and embedding healthy spending behaviours.

In stage 2 you build on your cash flow control fundamentals to begin consistently saving for those infrequent but predictable expenses and life experiences that matter to you.

As you begin consistently saving for expenses that are further into the future you progress into stage 3.

It is then that broadening your focus to the second C of Money Mastery, wisely investing your capital, will provide good reward for your effort. Stage 3 is the time to evaluate your entire financial situation and implement a comprehensive plan that coordinates all financial elements, including ensuring your existing investments are working hard for you.

What not to do

Despite the popularity of borrowing to invest (gearing), especially into residential property, I believe it is not developmentally appropriate to use wealth acceleration strategies until you’ve nailed stage 4 and only if you want to target early retirement (stage 5).

And I believe it’s unnecessary to chase higher potential returns in more complex non-mainstream investments unless you want to target stage 6.

Whilst stages 5 and 6 are alluring, first do your financial apprenticeship. Without first developing fundamental competence in cash flow management and investing you will often be taking more risk than you can handle. Typically, you won’t realise until it’s too late and you’re sliding/crashing back down the stages.

Another common mistake is to pursue investing when you’re in stages 1 and 2, in the hope that passive income will help you get out of debt. An investment will not solve a spending problem.

Set your target

Everyone’s definition of a life they love is different. Different experiences with different costs.

To support you in making smart yet tough financial decisions
it’s very helpful to define an inspiring vision of a life you love. Then make it tangible and actionable by estimating the cost of those experiences.

It’s okay if you’re not yet sure how to define that life, and certainly it’s not a pre-requisite to taking action right now. In the six stages table I’ve suggested some targets for your net wealth that you can adopt until you refine a personal target.

The target of $640,000 for stage 4 is from the ASFA Retirement Standard for couples at April 2018, and assumes current age pension eligibility rules. It’s such an important target that if you are in stage 3 I recommend you engage a certified financial planner professional to help you calculate the right number for you.

An aside about contingencies

The above Six Stages of Wealth Creation model focuses on cash flow and capital strategies.

But misfortune can strike at any time, therefore it’s important to concurrently consider your contingency plans, such as growing your liquid savings and acquiring income protection insurance. Both of these actions are available to you, even if you’re living pay-to-pay and a financial planner will show you how.

]]>2156https://matthern.com.au/2018/12/start-here/Three prerequisites of self-managed superannuationhttp://feedproxy.google.com/~r/MattHernsMoneyGuide/~3/FXI0imS1SQY/
Sun, 30 Sep 2018 08:35:22 +0000https://matthern.com.au/?p=2127Self-managed superannuation has long been a popular topic for people aspiring to take more control of their superannuation. And since the Royal Commission I’ve noticed an increase in enquiries from people wanting to start their own self-managed superannuation fund (SMSF).

I wholeheartedly encourage everyone to engage with their superannuation because for almost everyone it will be the largest component of their net wealth at retirement.

However, before considering a SMSF, you need to be able to emphatically answer ‘yes’ to each of these three questions:

Can you accurately explain what superannuation is?

Do you currently take an active interest in your superannuation?

Is your balance more than $300,000?

If you answer ‘no’ to any of those questions, then a SMSF will cost you more in fees and time than an off the shelf fund. And you will make less money too.

As a SMSF trustee you have the responsibility for complying with all the superannuation laws. If you don’t understand superannuation, then being a trustee is dangerous. There are some responsibilities you can’t pay to outsource.

If your interest in a SMSF is to get more control of your superannuation, then the best first step is to invest the next 12 months in thoroughly understanding the options within your current superannuation fund.

Once you understand how superannuation works, next research the many off the shelf funds that give you access and control over a very wide variety of investments without taking on the responsibility of being a trustee. Many such funds cost less than running a SMSF and are a great choice, even for people with over a million dollars in superannuation.

]]>2127https://matthern.com.au/2018/09/three-smsf-prerequisites/The three best tax deductionshttp://feedproxy.google.com/~r/MattHernsMoneyGuide/~3/pIV7odrhr20/
Thu, 20 Sep 2018 02:58:36 +0000https://matthern.com.au/?p=2113The most frequent query I receive from higher income earners relates to how to reduce their income tax.

I’m pleased they ask, because the most common tax reduction method of the non-advised is one of the least appropriate, which is negative gearing a residential property. I believe that’s the least appropriate for most people because it concentrates your risk in one big volatile asset and the annual cash flow loss puts many people under pressure.

Instead, if you have surplus income here are the best three tax deductions I suggest you consider. One is a gift for others, two are gifts for you.
As you consider my suggestions remember that all tax deductions reduce your cash flow, that’s why you receive a deduction, so the principle is to get the most value for money for what you pay out.

Charitable donation

I believe the purpose of money is to support a fulfilling life, and happiness research has demonstrated that helping others gives us a big buzz. So, if you’re blessed to feel you pay too much tax then sharing some of your surplus income with those less fortunate is excellent bang for your buck.

Income protection insurance

Your ability to earn an income is your most valuable asset, more valuable than your home or vehicle. Protecting your lifestyle in the event of illness or injury is a gift to your peace of mind and financial resilience.

Income protection insurance should be a foundation of your financial contingency plans. It’ll help you avoid needing to rely on the generous charitable donations of others if misfortune strikes. And the premiums for income protection insurance are generally tax deductible.

Deductible superannuation contribution

The third best tax deduction is a gift to your future self. Contributing your surplus income to superannuation as a deductible contribution gives the average income earner an immediate 30% return on investment (ROI) in the first year because of the tax saving. For higher income earners the first year ROI is even greater. You can waste a lot of time researching investments to get that high a return, or you could just regularly salary sacrifice to superannuation.

When using this tax reduction method keep an eye on the cap for concessional contributions, which currently is $25,000 per year. Employer, salary sacrifice and personal deductible contributions all count toward the cap. If you’re unsure seek professional advice.

My final tip for higher income earners is that instead of focussing on how much tax you’re paying, focus on how best to use your income to grow your net wealth toward financial independence. Tax is just one consideration in wealth creation, and it’s not even the most important.

]]>2113https://matthern.com.au/2018/09/three-best-tax-deductions/To Have and Withholdhttp://feedproxy.google.com/~r/MattHernsMoneyGuide/~3/XAYiPhfi0CA/
Thu, 13 Sep 2018 13:43:38 +0000https://matthern.com.au/?p=2109Are you living with your partner (or contemplating it) and already have hard-earned assets that you’d prefer not to lose if you break up? Then it’s worth exploring a Binding Financial Agreement (BFA), which is the Australian legal term for ‘pre-nups’.

As family lawyer, Malcolm Gittoes-Caesar said on this episode of SBS Insight ‘We all become very different people when we separate.’ So relying on the love and trust you feel now may be folly.

This episode ‘To Have and Withhold’ was a fascinating discussion of Binding Financial Agreements, which is well worth watching to discover a breadth of perspective from lawyers and couples alike.

Whether you ultimately decide to have a BFA or not I recommend you at least have a discussion with your partner about each of your expectations of how your assets will be split if the relationship ends.

And then just like insurance, I hope you never ever need to use your BFA.

]]>2109https://matthern.com.au/2018/09/to-have-and-withhold/Net Wealthhttp://feedproxy.google.com/~r/MattHernsMoneyGuide/~3/pmbo_YRzsFw/
Thu, 06 Sep 2018 13:01:12 +0000https://matthern.com.au/?p=2103A primary purpose of creating wealth is to achieve financial independence, which is the point when you can afford to choose not to work.

Net Wealth is the key measure of your progress toward financial independence and therefore is important to understand and track.

Net Wealth = Investments less Debts

In the above formula:

Investments includes superannuation and non-superannuation.

Debts includes all lifestyle and investment debts.

It’s important not to confuse your net wealth with your net worth, which is a separate measure. (Net Worth = Own less Owe.) If you prefer not to sell lifestyle assets to fund your ‘retirement’ lifestyle then net worth is not a useful measure of your progress to financial independence.

Set your net wealth target

To estimate your net wealth target first define the following three key variables:

The age you want to achieve financial independence

The annual cost of your desired lifestyle

To what age you want to be able to continue to fund that lifestyle. (I recommend plan for your money to last at least until age 90.)

There are online calculators to help you calculate your target or alternatively refine the number in collaboration with a financial planner.

A useful starting point is the ASFA Retirement Standard, which estimates that a couple will need to accumulate $640,000 and a single $545,000 to fund a comfortable retirement.

Smart decisions

When you’re starting out and have lifestyle debt such as a home mortgage, your net wealth typically is negative.

By inspecting the formula we can see that repaying debt is just as effective at increasing your net wealth as a new investment. In fact, it may be argued that repaying debt is more effective due to the certain rate of return.

Therefore, to accelerate your journey to financial independence think carefully before taking on new debt, especially for lifestyle items. Plan for the Predictable.

]]>2103https://matthern.com.au/2018/09/net-wealth/Are you investing or gambling?http://feedproxy.google.com/~r/MattHernsMoneyGuide/~3/qTKeRTswAeE/
Sun, 19 Aug 2018 10:47:52 +0000https://matthern.com.au/?p=2085When is buying a share, investing and when is it gambling?

When is investing, wealth creation?

If you’re buying an investment without thorough research then you are speculating based on a story, which is close enough to gambling.

For example, if you’ve bought a share without reading the most recent annual report and quarterly statements of the company then you’re speculating not investing. How can you understand the company prospects without reading their public statements?

If that sounds like the way you’ve been ‘investing’ then you’re not alone but be careful not to delude yourself about your prowess. Any gains you make are luck rather than skill. So don’t rely on your portfolio to fund your retirement and more you would other forms of gambling.

Investing to create wealth

Which leads to the special sauce that distinguishes wealth creation from investing – skill.

When learning something new you can be very thorough, spending hours studying but it takes experience to turn knowledge into expertise.

Knowledge evolves into expertise through repeated and refined practice.

We, humans, have a tendency to confuse action with achievement. To confuse doing something with doing the right thing.

If you want to create wealth through do-it-yourself (DIY) investing then first invest in education, then invest in acquiring experience.

If however, you can’t be bothered doing the study and research but you still want to dabble in direct shares, that’s okay. Just be clear with yourself (and your partner) that your share portfolio is an entertainment expense, like any hobby. Your primary return will be in fun, not dollars.

In my next article, I’ll introduce you to three portfolios for aspiring DIY investors.

Consider joining finances as a gradual continuum of increased sharing. Share your finances at the same pace as you are sharing your life.

For example, share the funding of shared experiences such as dates or rent, and shared goals such as a planned holiday.

]]>2073https://matthern.com.au/2018/08/joint-finances/Why young people need a Willhttp://feedproxy.google.com/~r/MattHernsMoneyGuide/~3/eAjVUiRPmLs/
Sat, 04 Aug 2018 07:11:32 +0000https://matthern.com.au/?p=2059So, you like your partner enough to move in together – but do you love them enough to give them a couple hundred thousand dollars if you suddenly die?

The worst phone call I’ve received in my career is from a grieving mother whose 20-something son had tragically passed away while on holiday. She was calling to find out if he had a Will. Even though for the past couple of years I’d repeatedly recommended he complete a Will, to my knowledge he never got around to it. I guess it never seemed important enough.

You might think you don’t own much so don’t need a Will. Or maybe you assume your parents and/or siblings will automatically receive your money. That may not be true.

Have you checked the death benefit amount in your superannuation? It may be higher than you think due to automatic insurance cover you receive when you joined the fund.

If you live with someone with whom you are romantic, then it’s possible they could legally be considered your de facto spouse.

Parents and siblings are not among the class of superannuation beneficiaries. Under superannuation law your live-in lover may be the only eligible beneficiary for your balance and insurance payout.

If you love your partner, but not yet that much, then you may prefer your parents and/or siblings to receive your money.

To make that happen there are two steps you need to take:

In your superannuation make a valid non-lapsing binding beneficiary nomination for your estate (aka legal personal representative by some funds)

Execute a valid Will nominating your desired beneficiaries

The above steps are very important even if you don’t live with your lover. Without the above documents your money could be tied up in legal formalities for months or longer. Plus your estate planning is probably the last thing on your mind when you’re planning to move in with someone – so for peace of mind do it now.

Before you rush off and buy a cheap Will Kit from the newsagent or post office watch this video from lawyer, Tara Lucke about why those Wills are inadequate. Spend a few hundred dollars with an estate planning lawyer and get your first Will done right. (While you’re there also appoint enduring powers of attorney and guardianship.)

One final tip: In Australia marriage nullifies your Will so refresh the above steps before you walk down the aisle.

]]>2059https://matthern.com.au/2018/08/why-young-people-need-a-will/How to Manage Rising Life Insurance Premiumshttp://feedproxy.google.com/~r/MattHernsMoneyGuide/~3/GRGuyNS461k/
Tue, 24 Jul 2018 12:36:45 +0000https://matthern.com.au/?p=2046Continue reading How to Manage Rising Life Insurance Premiums]]>If you’re like me you’ve noticed that your personal insurance premiums steadily increase as you age, often by quite a lot. This is because most personal insurance claims are due to illness, which unfortunately becomes more prevalent with age.

The rising premiums can impact our cash flow and wealth creation plans, and it may make you wonder if it’s still a good idea to keep your insurance.

The good news is that there are plenty of choices available. Cancelling your policy completely leaves you and your family exposed. Instead, consider one or more of the following options to manage your cover as you age:

Reduce the sum insured

Review the optional terms you’ve selected

Review loadings if you’ve quit smoking or lost weight

Fund some cover through superannuation

Take advantage of annual discounts offered for staying active and healthy

Even when none of those options are suitable you may still be able to reduce your premiums by comparing your premium to the current market. Changing to a modern policy that offers better value for money can be a great option when our health is as good or better than when you first obtained cover.

Review the sum insured

There’s no set level of cover that people need – it’s entirely based on the lifestyle choices you’d like to be able to afford if a certain event occurred. When you haven’t yet accumulated enough wealth to fund those choices then insurance can temporarily plug the gap.

As you progressively repay debt and accumulate wealth your funding gap reduces. Every few years, you may therefore be able to reduce your sum insured. Insurance premiums are proportionated to the sum insured, so you can readily estimate how much you may save.

One caution – if you foresee life changes that may increase your need, for example through extra debt, lower income or growing your family, then pause and review your funding needs before adjusting your cover.

Review the optional terms you’ve selected

Income protection policies are one of the more expensive due to covering the most likely event of short to medium term disablement. To reduce the premium there are several options you can adjust:

Increase the waiting period, which may be applicable if you now have large amounts of available sick leave or easily accessible savings.

Reduce the benefit period, which may be suitable if your wealth accumulation enables you to retire earlier.

Switch to an indemnity policy, rather than agreed value.

Remove the “indexation of benefit on claim” option

Across all cover types, other optional benefits you may have on your policies include:

A choice of Basic or Premium cover

A choice of disability definition between “Own occupation”, “Any occupation” or “Activities of Daily Living”

Cover reinstatement after claim

Death cover buy back after claim

Fund some cover through superannuation

When you still want the same level of cover and benefit options but don’t have the cash flow to fund the premiums right now you may be able to use your superannuation to fund the premiums. Death cover and some Total & Permanent Disability (TPD) and income protection cover may be owned by a superannuation fund.

Whilst it may help your cash flow there are impacts on your estate planning and wealth creation, so ensure you consider your whole financial plan before changing your policy ownership.

Take advantage of annual discounts offered for staying active and healthy

Traditionally insurers have charged extra for people with a history of illness that increases their chance of another illness. Healthy people received standard rates, often which were guaranteed despite a later decline in health, so long as their policy remained in force.

Several insurers are now offering annual premium discounts for people who demonstrate they are still healthy and active. The programs differ between insurers with some being as simple as a quick medical check-up each up each year, which is a good idea in any case. So, if you’re healthy consider switching to a new policy that includes this discount option.

Or if your policy currently has a premium loading but your health has since improved, for example, you’ve lost weight or quit smoking, then you can apply to have your loading removed.

Choose commission-free advice and save on premiums

Would you like a discount of between 20-30% for the life of your policy? Then choose fee for service insurance advice with commissions rebated.

When commission on new investment and superannuation products was banned in July 2013 the Government didn’t ban commission on insurance because research suggested ‘the average consumer’ was unwilling to pay for advice.

However, if you’re not ‘average’ then you can choose fee for service insurance advice with commissions rebated. Typically, your cumulative premium savings will recoup the advice fee within 3 to 5 years. Thereafter you’re ahead, meaning extra money you can dedicate to creating wealth, which in turn can reduce your need for cover as discussed earlier.

Assess the right choice for you

One great benefit of aging is that we grow wiser (hopefully). If you’re concerned about rising premiums, then consider which of the above options may best suit your life now. Before acting ensure you consider the consequences of reducing your benefit.

If you are unsure how to assess the right trade-off for you then meet with a specialist insurance adviser for personal advice.

]]>2046https://matthern.com.au/2018/07/reduce-insurance-premiums/Winner of the AMP Advice Competitionhttp://feedproxy.google.com/~r/MattHernsMoneyGuide/~3/xRkyTqsHJYs/
Fri, 09 Sep 2016 05:51:06 +0000http://moneyguide.com.au/?p=1964Continue reading Winner of the AMP Advice Competition]]>I am really chuffed to share with you that last week I was announced as the winner of the AMP Advice Competition.

The competition was open to advisers across all of the AMP licensees and we had to submit our recommended strategies for a set client case study. Following is the feedback I received when the result was announced: